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Chapter 07 Testbank
1. AASB 102 Inventories applies to biological assets related to agricultural activity.
FALSE
2. The first-in, first-out (FIFO) method assumes that items remaining in inventory at the end of the period are those most recently
purchased or produced.
TRUE
3. In periods where production costs or purchase prices of inventory items do not change, it does not matter which inventory method is
adopted as this would generate the same value for cost of goods sold and ending inventory.
TRUE
4. FIFO method is an income decreasing inventory cost flow method in periods of rising prices.
FALSE
FALSE
7-1
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6. Upward revaluation of inventory is permitted for as long as all assets in same inventory class are revalued.
FALSE
TRUE
8. The definition of inventories includes assets in the form of materials or supplies to be consumed in the production process or in
rendering of services.
TRUE
9. AASB 102 provides that inventories must be valued at the lower of cost and net realisable value for groups of homogeneous items
where it is impracticable to measure them on an item-by-item basis.
TRUE
10. AASB 102 applies to all inventories including work in progress under construction contracts.
FALSE
11. The cost of sub-contracted work is not included in costs of conversion for the purposes of calculating the cost of inventory.
FALSE
7-2
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12. AASB 102 requires that fixed manufacturing costs be excluded from the cost of inventories, as they cannot be allocated accurately.
FALSE
13. Standard costs may be used to arrive at the cost of inventory only where standards are set at ideal levels and any costs arising from
exceptional wastage are excluded from the cost of inventories.
FALSE
14. The value of inventory reported in the financial statements under AASB 102 may be reported at an amount lower than its original
cost.
TRUE
15. The cost-flow assumption selected for inventory costing purposes should always reflect the physical flow of goods out of
inventory.
FALSE
16. The only difference between IAS 2 and AASB 102 is that the 'international' standards allow inventory to be valued using LIFO.
FALSE
AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Section: Inventory cost-flow assumptions
Topic: Inventory valuation under international accounting standards and Australian standards
7-3
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McGraw-Hill Education.
17. A company engaged in buying and selling equity securities should consider this asset as inventory and should be accounted for in
accordance with AASB 102.
FALSE
FALSE
AACSB: Analytic
Difficulty: Easy
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories.
Section: The general basis of inventory measurement
Topic: Measurement of inventory
19. Perpetual inventory system is also known as the physical inventory method.
FALSE
20. When reversing a previous period inventory write-down, this would result in a debit entry to the inventory account.
TRUE
7-4
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McGraw-Hill Education.
22. AASB 102 on inventories does not apply to:
A. the lower of cost and recoverable value, on an item-by-item basis where practicable.
B. cost or fair value for classes of assets and services that are defined as inventories.
C. the lower of cost and net realisable value, on an item-by-item basis where practicable.
D. cost or deprival value, whichever is the lower, for classes of inventories.
A. must value their assets at the lower of cost or net realisable value to allow reports to be compared.
B. should only report inventories at cost for simplicity.
C. should value their assets at either cost or current replacement cost, whichever is more beneficial.
D. will record the inventories at the lower of cost or current replacement cost.
7-5
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26. The cost of inventory is defined by AASB 102 as including:
27. Fixed production costs are those that, within normal operating limits:
28. The two main methods for dealing with fixed costs in relation to the production of inventory are:
29. Which of the following statements is correct in relation to the costing of inventories?
A. Direct costing treats fixed production costs as an expense of the period and is not permitted as a method for valuing inventories under
AASB 102.
B. Absorption costing treats fixed production costs as a product cost, allocating them to the goods produced, and is not permitted as a
method for valuing inventories under AASB 102.
C. Absorption costing treats fixed production costs as an expense of the period and is the required method for valuing inventories under
AASB 102.
D. Direct costing treats fixed production costs as a product cost, allocating them to the goods produced, and is not permitted as a method
of valuing inventory under AASB 102.
7-6
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30. Standard costs are able to be used under AASB 102 where:
31. Digitoll Ltd produces a range of computer accessories. One product is a webcam. The following are the summary costs for the web-cam for the
period ended 31 December 2012:
The production level this period was normal at 10 000 units. What is the cost per unit (rounded to the nearest cent) in accordance with AASB 102
requirements?
A. $11.00
B. $10.40
C. $14.10
D. $11.90
7-7
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32. Handy Ltd produces a line of brooms. The summary cost information for brooms for the year ended 30 June 2012 is:
The level of output for the period was the normal level of production of 290 000 units. What is the cost per broom (rounded to the nearest cent) in
accordance with AASB 102 requirements?
A. $4.13
B. $2.00
C. $0.13
D. $2.06
33. Toey Ltd has provided the following information about the total production cost and estimates of realisable value of three lines of shoes they
produce within the same class of inventory:
Packaging and freight are necessary in order to be able to sell the shoes. What is the value of the inventory in accordance with AASB 102?
A. $34 000
B. $40 000
C. $32 000
D. $24 000
7-8
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34. The following information relates to the total production costs and estimates of realisable value for a line of water pistols produced by Splash Happy
Co Ltd.
Packaging and transport costs are necessarily incurred in order to be able to sell the inventory. What is the value of the inventory in accordance with
AASB 102?
A. $37 000
B. $21 000
C. $39 000
D. $36 000
35. Balmoral Ltd commenced business on 1 July 2011. The company manufactures bookcases. Summary data for Balmoral's first full year of
operations are:
Packaging and delivery are essential to be able to sell the product. What total value should be attributed to finished goods inventory in the financial
statements in accordance with AASB 102?
A. $58 950
B. $63 000
C. $49 500
D. $69 660
7-9
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36. Video Productions Ltd commenced business manufacturing video tapes on 1 July 2011. Summary data for the first full year of production are:
Packaging and delivery are essential to be able to sell the product. What total value should be attributed to finished goods inventory in the financial
statements in accordance with AASB 102?
A. $66 400
B. $72 000
C. $46 400
D. $50 000
7-10
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38. According to AASB 102, one or more of which set of methods should be used to apply the costs of inventories to particular items of
inventory?
AACSB: Analytic
Difficulty: Easy
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Cost-flow assumptions
39. AASB 102 requires that the specific identification method of assigning cost to items of inventory be applied:
40. In times of rising prices for inventory, which of the following is true?
A. LIFO adopters would report higher cost of goods sold and lower ending inventory than FIFO adopters.
B. FIFO adopters would report higher profits and lower ending inventory than LIFO adopters.
C. LIFO adopters would report higher profits and higher ending inventory than FIFO adopters.
D. FIFO adopters would report higher cost of goods sold and higher ending inventory than LIFO adopters.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Cost-flow assumptions
41. Use of the LIFO method has been deemed unacceptable under AASB 102 because:
A. it presents too many options to report preparers and may confuse them.
B. this method allows profits to be manipulated by purchasing items at year's end even though they have not been sold.
C. it can result in higher cost of goods sold figures and therefore lower taxes.
D. this method did reflect the actual physical flow of inventories.
7-11
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42. In addition to the cost-flow assumption, the system used to record movements in inventory also affects the determination of the cost
of inventory. What are the systems commonly in use for recording the movement of inventory?
7-12
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44. Big Games for Big Kids sell a variety of gaming consoles and games. The company has presented you with the following information for the sales
of a new product, Angel's Hat 2, for the three months from November to January. They began in November with 50 units on hand valued at $1500. In the
lead up to Christmas each unit sold for $90 but in the post-Christmas sales in January this price was reduced to $50.
Big Games for Big Kids use the periodic system to record inventory. A physical stock take reveals 30 units on hand at the end of January. What is the
cost of sales and value of ending inventory using the FIFO cost-flow assumption?
A. gives the same results as a perpetual system when FIFO is applied but without some of the extra detail.
B. is much more cost-effective as a perpetual system requires a computer.
C. does not require a stock take each year and is therefore more accurate.
D. accurately reports all stock movements which assists with decision making.
7-13
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46. Oblong Ltd manufactures cardboard boxes for a variety of purposes. The following information relates to the production of the extra-large packing
boxes used by removalists for the period ended 30 June 2012.
The company uses a perpetual inventory system. The net realisable value per extra-large cardboard box is $3.15 at the end of the period. What are the
costs of sales and the value of ending inventory for Oblong Ltd assuming the FIFO cost-flow assumption is used?
7-14
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47. Rectangle Ltd manufactures cardboard boxes for a variety of purposes. The following information relates to the production of the extra-large
packing boxes used by removalists for the period ended 30 June 2012.
The company uses a perpetual inventory system. The net realisable value per extra-large cardboard box is $3.15 at the end of the period. What are the
costs of goods sold and the value of ending inventory for Rectangle Ltd assuming the LIFO cost-flow assumption is used?
7-15
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48. Circle Ltd manufactures polystyrene trays for a variety of purposes. The following information relates to the production of the medium trays used
by meat packing companies for the period ended 30 June 2012.
The company uses a perpetual inventory system. The net realisable value per extra-large cardboard box is $0.17 at the end of the period. What are the
costs of sales and the value of ending inventory for Rectangle Ltd assuming the FIFO cost-flow assumption is used?
49. According to AASB 102 material information relating to which of the following must be disclosed?
7-16
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51. Kensington Ltd is an importer and retailer of European made glass crystals. For the year ended 30 June 2008, Kensington Ltd still
holds 30 units of an item originally purchased for $10 000 each and a net realisable value of $8000. On 1 June 2009 the TV show Home
Improvement featured a similar item prompting an increase in demand for this glass crystal. Management believes that the net realisable
value of this item is now $15 000. All 30 items remain unsold on 30 June 2009. What is the effect of holding this inventory on the
statement of comprehensive income of Kensington Ltd for the years ended 30 June 2008 and 2009?
A. No effect on both years because the inventory items are still unsold.
B. Decrease profit by $60 000 in 2008; increase profit by $210 000 in 2009.
C. Decrease profit by $60 000 in 2008; no effect in 2009.
D. Decrease profit by $60 000 in 2008; increase profit by $60 000 in 2009.
52. AASB 102 requires, among others, disclosure of which of the following pieces of information?
7-17
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53. Randwick Ltd has a year-end of 30 June 2009. During the year the following errors were discovered.
What is the net effect of above errors in the statement of comprehensive income and statement of financial position (inventory) accounts of Randwick
Ltd?
A.
B.
C.
D.
54. Consistent with positive accounting theory, an entity close to breaching their debt covenant will:
AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: The general basis of inventory measurement
Topic: Cost-flow assumption
Topic: Managerial choices and debt covenants
7-18
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55. David Gordon is an accountant for Bronte Ltd. At the end of the year he realised that ending inventory was overstated but the
purchases account was recorded correctly. What is the effect of correcting the above error in the statement of comprehensive income and
statement of financial position (inventory) accounts of Bronte Ltd?
A.
B.
C.
D.
7-19
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McGraw-Hill Education.
56. Bondi Ltd is a small sport shop. At the beginning of the period, Bondi Ltd had 30 tennis racquets on hand costing $50 each. On 31
October 2009, the shop sold 20 racquets to a tennis instructor for $80. A delivery of 50 racquets was received on 15 November 2009 at
$50 but received 2% discount if the account is paid within 30 days. What are the appropriate journal entries to recognise the above
transactions using the periodic system?
A.
B.
C.
D.
7-20
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57. Which accounting policy for manufacturing fixed costs is likely to favour managers whose firms are subject to political scrutiny?
A. Direct costing.
B. Absorption costing.
C. LIFO assuming prices are falling.
D. FIFO assuming prices are rising.
58. Which of the following statements is correct with respect to positive accounting theory?
A. Managers of firms with bonus-based contracts prefer LIFO method of valuation basis, if permitted.
B. Managers of firms with bonus-based contracts prefer FIFO method of valuation basis.
C. Managers prefer the FIFO method of valuation basis.
D. Managers with debt covenants prefer LIFO method, if permitted.
59. The inventory record of Palm Springs Ltd shows 1000 surf boards on stock that cost $50 each. During the last stocktake, the
accountant noted 100 old style surf boards with net realisable amount of $15. What journal entry would be required of Palm Springs to
comply with AASB 102?
A.
B.
C.
D.
7-21
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60. Paris Merchandising Ltd sells ladies skirts. The opening stock consisted of 300 skirts with purchase price of $50 each. Subsequent
purchases during the period include: 400 at $60 each and another 200 for $70 each. A total of 700 skirts were sold during the period.
What is ending inventory using FIFO method?
A. $10 000
B. $11 800
C. $12 000
D. $14 000
61. Las Vegas Ltd sells second hand luxury cars of various makes and models, and uses the FIFO cost-flow assumption to ascertain the
cost of ending inventory. This would be incorrect because:
62. Phoenix Ltd sells hard disks of similar make and model and reports an opening inventory on 1 July 2012 of 20 units purchased at $60. Its purchases
during are as follows:
What is the cost of ending inventory using FIFO and weighted average method respectively (rounded to the nearest dollar)?
A. $2100; $2209
B. $2100; $2250
C. $2400; $2209
D. $2400; $2250
7-22
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63. When calculating cost of inventory AASB 102 requires which of the following costs are to be excluded?
64. AASB 102 require that inventories be reinstated to the extent that the new carrying amount does not:
AACSB: Analytic
Difficulty: Easy
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions.
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Cost-flow assumptions
66. Under the perpetual system, a difference with the stocktake records might indicate:
A. damaged stock.
B. theft of stock.
C. obsolete stock.
D. all of the given answers.
7-23
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67. Which of the following is correct?
A. When prices of inventory are rising, FIFO will result in a higher COGS, lower gross profit and a lower total assets than weighted
average.
B. When prices of inventory are rising, FIFO will result in a lower COGS, higher gross profit and a higher total assets than weighted
average.
C. When prices of inventory are falling, FIFO will result in a lower COGS, higher gross profit and a higher total assets than weighted
average.
D. When prices of inventory are falling, FIFO will result in a higher COGS, higher gross profit and a higher total assets than weighted
average.
AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Inventory cost-flow assumptions
69. Which of the following policy changes would you not recommend be adopted if an entity has a profit-decreasing strategy to avoid
regulatory intervention?
AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Inventory cost-flow assumptions
70. Mascot Ltd’s management is considering changing an accounting policy and as their profit target has been met they are interested as
to which of the following policy changes would not affect the current period’s net profit?
AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Inventory cost-flow assumptions
7-24
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McGraw-Hill Education.
71. Which of the following policy changes would you recommend if Cremorne Ltd has a profit-increasing strategy to obtain
management bonuses?
AACSB: Analytic
Difficulty: Medium
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102.
Section: Inventory cost-flow assumptions
Topic: Inventory cost-flow assumptions
7-25
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Chapter 07 Testbank Summary
Category # of
Questions
AACSB: Analytic 10
AACSB: Reflective thinking 61
Difficulty: Easy 36
Difficulty: Hard 5
Difficulty: Medium 30
Learning Objective: 07-01 Understand the meaning of 'inventory'. 7
Learning Objective: 07-02 Be able to calculate the cost of inventory pursuant to AASB 102 Inventories. 23
Learning Objective: 07-03 Understand how to apply the lower of cost and net-realisable value rule for measuring inventory. 8
Learning Objective: 07-04 Understand how and when to reverse a previous inventory write-down. 2
Learning Objective: 07-05 Understand why there is typically a necessity to make inventory cost-flow assumptions. 14
Learning Objective: 07-06 Be able to apply the inventory cost-flow assumptions permitted by AASB 102. 19
Learning Objective: 07-07 Understand the difference between a perpetual and a periodic inventory system and how this influences 9
inventory valuation.
Learning Objective: 07-08 Know the disclosure requirements of AASB 102. 4
Section: Definition of inventory 3
Section: Disclosure requirements 3
Section: Introduction 3
Section: Inventory cost-flow assumptions 29
Section: Reversal of previous inventory write-downs 2
Section: The general basis of inventory measurement 33
Topic: Assigning costs 1
Topic: Biological assets 1
Topic: Cost of inventories calculation 1
Topic: Cost of inventory 1
Topic: Cost-assumption FIFO 1
Topic: Cost-flow assumption 3
Topic: Cost-flow assumption LIFO 1
Topic: Cost-flow assumptions 6
Topic: Cost-flow assumptions FIFO 2
Topic: Cost-flow assumptions LIFO 1
Topic: Costing inventory at the per unit level 2
Topic: Costing of inventories 1
Topic: Definition of inventories 2
Topic: Disclosure of inventories 1
Topic: Disclosure of inventories under AASB 102 1
Topic: Estimation of finished goods inventory valuation 2
Topic: Estimation of inventory valuation 2
Topic: FIFO method 2
Topic: Fixed costs 2
Topic: Inventories as a concept 1
Topic: Inventories disclosure 1
Topic: Inventories includes 1
Topic: Inventories: what do they include? 2
Topic: Inventory cost-flow assumptions 4
7-26
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McGraw-Hill Education.
Topic: Inventory valuation 2
Topic: Inventory valuation and profit 1
Topic: Inventory valuation under international accounting standards and Australian standards 1
Topic: Lower of cost and net realisable value 1
Topic: Managerial choice and cost-flow assumptions 1
Topic: Managerial choices and cost-flow assumptions 1
Topic: Managerial choices and debt covenants 1
Topic: market forces, inventory valuation method and cost of goods sold, ending inventory values 1
Topic: Measurement of inventory 1
Topic: Not-for-profit valuation of inventories 1
Topic: Periodic inventory system 2
Topic: Perpetual inventory system 2
Topic: Perpetual system 1
Topic: Recording inventories and applying lower of cost and net-realisable value 1
Topic: Reinstate inventories 1
Topic: Revaluation of inventories 1
Topic: Revaluation of inventory 1
Topic: Reversal of a previous inventory write-down 2
Topic: Reversal of previous inventory write-downs 1
Topic: Standard cost 2
Topic: The general basis of inventory measurement 1
Topic: Valuation of inventory 1
Topic: What is included in inventory? 3
7-27
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strife, or the readiness for strife, that a nation must win greatness.
We ask for a great navy, partly because we think that the possession
of such a navy is the surest guaranty of peace, and partly because
we feel that no national life is worth having if the nation is not willing,
when the need shall arise, to stake everything on the supreme
arbitrament of war, and to pour out its blood, its treasure, and its
tears like water, rather than submit to the loss of honor and renown.
In closing, let me repeat that we ask for a great navy, we ask for
an armament fit for the nation’s needs, not primarily to fight, but to
avert fighting. Preparedness deters the foe, and maintains right by
the show of ready might without the use of violence. Peace, like
freedom, is not a gift that tarries long in the hands of cowards, or of
those too feeble or too short-sighted to deserve it; and we ask to be
given the means to insure that honorable peace which alone is worth
having.
FOOTNOTES:
[20] Address as Assistant Secretary of the Navy, before the
Naval War College, June, 1897.
XIII
NATIONAL LIFE AND CHARACTER[21]